Revenue sharing: the next big thing

Gauging the market slump, the retailers and also the developers of the retail space are proposing more flexible formats to tide over. One such model is revenue sharing which will more realistically justify the overall not so profitable market scenario.

Suranjana Basu

Marks & Spencer Reliance India (MSRI), formed by a JV between the leading UK-based retailer Marks & Spencer and Reliance Retail, has recently opened their first retail outlet in India and is planning to open another 50 outlets in the next five years. The company has seriously considered revenue sharing model for its feasibility in the context of today’s market scenario. The company has signed revenue-sharing deals with developers for its next four to five outlets. The reason has been positively highlighted by Mark Ashman, CEO, MSRI. The model which is so successful in the UK has no reason to fail in India, he opines on the store launching occasion in Mumbai. It is an acknowledgement to the developers for their contribution in developing the mall and marketing the same. “The extra revenue earned by retailers should be shared as an incentive to the developers. The entry costs can also be brought down through this model,” he added. Even the most successful retail brand in India, Pantaloon Retail India Limited, has endorsed this format for about its 10 outlets. The noted discount retail brand, The Loot, followed the same suit by sealing revenue-sharing deal for 25-30 stores.

Who are going to be the most benefited? It is thought that the anchor retailers who are in value retailing with high capability of sales conversion will be the highest beneficiaries. Generally, a developer charges Rs 25 to Rs 30 per sq. ft per month as the minimum guarantee money that retailers have to pay, besides taking a 5 per cent cut of the retailer's revenues, whereas leasing property in malls costs between Rs 150 and Rs 500 per sq.ft depending on location and city.

Developers who are seeking long-term relation with the retailers are in favour of this model and its introduction in the Indian market was first carried out by the renowned mall developer EWDPL. The Managing Director of the company Manish Kalani believes that this is the only way to leverage on rising consumption yet protecting the downside by fixing minimum guarantee as rentals.

Required to be mutually beneficial
However, the model requires serious reviews. Where the retailers reluctant to give fixed charge in the form of minimum guarantee, the model succumbs. Some feels that for the developer it is a time consuming process to generate return on investment, and if the retailer exits early then the developer will be at the loser’s end.

The hitch exists and the complaints are raised by some retailers who aspire to set up shop at renowned places like the recently launched domestic departure terminal 1D at the Delhi airport which has managed to lure the big retailers like Swarovski, Croma, Satya Paul, Fresco and Haldiram’s. The high minimum guarantee and 10 per cent revenue sharing seem to be unmatched with the dismal passenger traffic for the rising air fare.

But it is the only model that can withstand the ups and downs of the market economy and success can be achieved by striking the balance